What is the risk -free rate?

Risk -free rate is an interest rate that applies to a financial tool that is considered to be without risk of failure. Although there is no financial tool that does not have a certain degree of risk, assets such as government securities are generally considered to be such a small amount of risk that they meet the standard for classification as without risk. All interest raised at the time the investor holds a financial instrument is calculated as an interest rate without risk. Depending on the conditions related to the asset, the rate without risk in the form of a fixed rate or variable interest rate may be.

It is important to realize that while assets that carry without risk are practically without default, other types of risk factors can still be paid. For example, changes in interest rates that are paid on the market may have some extent to the asset. Similarly, any factor that would make the SELL asset for cash in a relatively short period of time would increase the level of liquidity -related riskby a.

The main advantage of a financial tool that comes with an interest rate without risk is that the possibility of an issuer's failure is so low that a certain unlikely chain of events must occur before starting the starting situation. For people looking for the safest possible investments, a bond issued by the government would be an excellent choice. Over the past decades, a number of national governments have issued these types of bonds, which allowed people with limited income to occasionally buy a bond, hold it for many years, and then took the bond for the original payment plus the interest -raised interest.

While the risk of a financial instrument failure that earns a risk without risk, there is practically no investment of this type may be some investors is not the best choice. Since there is such a small risk, it is likely that interest rate without risk will be lower than the interest obtained from bond issues and other relaysto a secure investment. For this reason, it is important that the investor is carefully inspected not only for the amount that has been earned throughout his life, but also for how long it will take to ripen. If the duration to maturity is longer than the fees for investors fair to the return level, it would do well to focus on other investment opportunities that include a slightly greater risk, but also provide higher return.